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Course Name

Module 56/ PGPPM

Candidate Name
Course Title Reg. No. Assignment No. Date of Dispatch

Ashar Milind Mahesh Rashmi

Projects Formulation & Appraisal 210-03-31-8104-2123 PGPM 21 25th February 2011

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 Project Formulation: Taking a first look carefully and critically at the project idea Carefully weighing its various components Analyzing with the assistance of specialists or consultants Assessment of the various aspects of an investment proposition It is an important stage in the pre-investment phase Stages of Project Formulation Entrepreneurship Management 1. Feasibility Analysis 2. Techno-Economic Analysis 3. Project Design and Network Analysis 4. Input Analysis 5. Financial Analysis 6. Cost-Benefit Analysis 7. Pre-Investment Analysis 1. Feasibility Analysis: First stage in project formulation Examination to see whether to go in for a detailed investment proposal or not Screening for internal and external constraints Conclusion could be: The project idea seems to be feasible The project idea is not a feasible one Unable to arrive at a conclusion for want of adequate data 2. Techno-Economic Analysis: y Screens the idea to Estimate of potential of the demand for goods/services y Choice of optimal technology y This analysis gives the project a platform for preparation of detailed project design 3. Project Design and Network Analysis: It is the heart of the project entity It defines the sequence of events of the project Time is allocated for each activity It is presented in a form of a network drawing It helps to identify project inputs, finance needed and cost-benefit profile of the project 4. Input Analysis: Its assesses the input requirements during the construction and operation of the project It defines the inputs required for each activity Inputs include materials, human resources It evaluates the feasibility of the project from the point of view of the availability of necessary resources This aids in assessing the project cost

Methods and Tools for Project Formulation: y Problem Tree Analysis y Stakeholder Analysis y Logical Framework Analysis y Goal-Oriented Project Planning (ZOPP) The Problem Tree Purpose: to identify major problems and their main causal relationships. Output: a graphical arrangement of problems differentiated according to causes and effects

Core Problem Approach 1. Identify a core or central problem 2. List all the problems related to or stemming from the core problem 3. Determine which related problems are causes and which effects of the core problem 4. Arrange the problems in a causeeffect heirarchy around the core problem

From Problems to Objectives The Problem Tree provides the basis for: a) the identification of specific project objectives (by converting problems or constraints into specific objectives) b) the definition of project activities and outputs (by substituting cause-effect relationships with means-end relationships) Problem Tree Analysis Relies on: Group-based inter-action eg. Workshop format Participation of key stakeholders Process facilitation Achieving consensus on problems, causes and effects

i.

Market analysis

There are a number of techniques for evaluating projects and these are outlined in Chapter 10. The most usual of these techniques is to prepare a financial analysis, where the costs and revenues of a project are represented as a financial statement as cash flows. To do this, all the physical inputs required over a project's life will need to be phased and then costed on an annual basis, in present-day prices. Typical inputs, which would be compiled in a tabulated form, may include: civil works (buildings and infrastructure); equipment; technical assistance and professional fees of design and supervision consultants; furniture and fittings; land purchase, and temporary rental of accommodation. Recurrent costs will include staff wages and salaries and other operating expenditure, such as interest payments, insurances, office overheads, utilities, repairs and maintenance, audit fees and depreciation. These costs are set against the anticipated revenues derived from renting space to wholesalers, parking fees, commission on auctions and other charges. Accurate cost estimates of capital works, recurrent expenditure and anticipated revenues for a project are often not possible at this stage and, in preparing the cash flows, assumptions will need to be made. These are again described in Chapter 10. Financial and economic analysis The expected returns of a project should be initially analyzed on the basis of the projected cash flow for the "basic case". This will produce a financial "internal rate of return" (IRR), represented as a percentage and a "net present value" of the project, represented as a monetary sum. Project returns and methods of calculation. As markets are often fully or partially financed by central or local government funding (see Chapter 7) they have to compete with other projects for this financing. It is usual, therefore, to expect that a project will have a return at least equal to what might be expected from comparable investments. A typical range of values would be between 10 -20 percent. Net present values should always be positive and exceed the total capital outlay on the project.

Internal rates of return and net present values are discussed in Chapter 10. They can be calculated manually but it is more usual to use either the financial functions on a desk calculator or to enter the cash flows into a spreadsheet program on a personal computer. The latter is most convenient, as variations can be calculated most easily.

ii.

Technology and system feasibility

The assessment is based on an outline design of system requirements in terms of Input, Processes, Output, Fields, Programs, and Procedures. This can be quantified in terms of volumes of data, trends, frequency of updating, etc. in order to estimate whether the new system will perform adequately or not. Technological feasibility is carried out to determine whether the company has the capability, in terms of software, hardware, personnel and expertise, to handle the completion of the project

iii.

Financial analysis

Economic analysis is the most frequently used method for evaluating the effectiveness of a new system. More commonly known as cost/benefit analysis, the procedure is to determine the benefits and savings that are expected from a candidate system and compare them with costs. If benefits outweigh costs, then the decision is made to design and implement the system. An entrepreneur must accurately weigh the cost versus benefits before taking an action. Cost-based study: It is important to identify cost and benefit factors, which can be categorized as follows: 1. Development costs; and 2. Operating costs. This is an analysis of the costs to be incurred in the system and the benefits derivable out of the system.

 PROJECT EVALUATION: A project is a set of activities, limited in space, time, and scope, which is to achieve specified objectives. Project evaluation is the control of the planning and implementation of project activities with regard to the objectives to be achieved. This means that project evaluation, just like program evaluation (see below), puts normative assessments into the context of planning and management and hence into the context of intentional action and cycles of action. Here not only the assessment of facts and scenarios is important but also the, more or less implicit, causal chains which connect activities with project results and finally with goal achievement Program Evaluation and Review Technique

PERT network chart for a seven-month project with five milestones (10 through 50) and six activities (A through F). The Program (or Project) Evaluation and Review Technique, commonly abbreviated PERT, is a model for project management designed to analyze and represent the tasks involved in completing a given project. It is commonly used in conjunction with the critical path method or CPM. i. Market and real estate feasibility:

Market Feasibility Study typically involves testing geographic locations for a real estate development project, and usually involves parcels of real estate land. Developers often conduct market studies to determine the best location within a jurisdiction, and to test alternative land uses for given parcels. Jurisdictions often require developers to complete feasibility studies before they will approve a permit application for retail, commercial, industrial, manufacturing, housing, office or mixed-use project. Market Feasibility takes into account the importance of the business in the selected area.

ii.

Technical analysis:

The study of relationships among security market variables, such as price levels, trading volume, and price movements, so as to gain insights into the supply and demand for securities. Rather than concentrating on earnings, the economic outlook, and other business-related factors that influence a security's value, technical analysis attempts to determine the market forces at work on a certain security or on the securities market as a whole Technical Analysis The practice of using statistics to determine trends in security prices and make or recommend investment decisions based on those trends. Technical analysis does not attempt to determine the intrinsic value of securities, but instead focuses on matters such as trade volume,

demand, and volatility. Technical analysts evaluate short-term trends almost exclusively, which is both a strength and a weakness in their analysis. They are sometimes called chartists because of the importance charts have in technical analysis. A method of evaluating securities by analyzing statistics and data such as historical prices and trading volumes. Technical analysts do not attempt to measure a security's intrinsic value but instead use charts, graphs, and other analytic tools to identify patterns that they believe will help predict future activity. Technical analysts believe that the historical performance of stocks and markets provides indications of future performance. In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy the store. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, he or she would base the decision on the patterns or activity of people going into each store iii. Financial analysis :

refers to an assessment of the viability, stability and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Based on these reports, management may: Continue or discontinue its main operation or part of its business; Make or purchase certain materials in the manufacture of its product; Acquire or rent/lease certain machineries and equipment in the production of its goods; Issue stocks or negotiate for a bank loan to increase its working capital; Make decisions regarding investing or lending capital; Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business

Goals Financial analysts often assess the firm's: 1. Profitability - its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations; 2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term; 3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations; Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time. 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. Methods Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.): Past Performance - Across historical time periods for the same firm (the last 5 years for example), Future Performance - Using historical figures and certain mathematical and statistical techniques, including present and future values, This extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects. Comparative Performance - Comparison between similar firms.

 PROJECT APPRAISAL: Project Appraisal is Systematic and comprehensive review of the economic, environmental, financial, social, and technical and other such aspects of a project to determine if it will meet its objectives.

Feasibility appraisal: Most major investment agencies require that the completed feasibility study be subject to a review by an Appraisal Mission. Following completion and submission of the project proposals, a review carried out by the Appraisal Mission leads to the final decisions as to whether the project should be implemented, modified or rejected. The main purpose of the Appraisal is to confirm that the project is: - in conformity with the country's development objectives and immediate priorities; - technically sound, and the best of the available alternatives under existing technical and other constraints; - administratively workable; - unlikely to affect the environment adversely

i.

Steps for project appraisal/Aspects of project appraisal Economic Aspects Technical Aspects Organizational Aspects Managerial Aspects Financial Aspects Market/Commercial Aspects

ii.

Market Analysis:

The market for life skills training software can be segmented into four groups. The first is centers for independent living, the second is school districts, the third is proactive parents, and the last is agencies charged with special education administration. Each of the four segments is distinct and will be communicated with in different ways. These four segments have been chosen because they are the main purchasers of products for individuals with developmental disabilities.

SWOT Analysis:  Strength: y Highly qualified staff y Introduction of new technology y Providing customized products. y Focusing on multiple target markets. y Quality value added services.  Weakness: y Lack of training within organization in start of business y Name recognition  y y y  y y y Opportunities: Vast market Untapped target market to cover Variety of products according to clients demand Threats : Globalization trend High turn over rate Impact of Economy deterioration in market.

Recommendations: a. I would like the proposed organization structure to be followed including the independent function of the quality control manager and observe the growth of the organization for many such projects to come in the near future. b. The line organization function should strictly follow the written communication pattern in order to effectively function as an efficient organization c. Closely monitored information brings to light the data on the live wires and real performers who under the watchful eye of the Top Management get the right incentives and enhancement in their position as earlier indicated. d. The Human Resource so treated. And developed remain the backbone of the Organization in the days of fierce competition and help the organization to survive and stand on its own. It is the most intangible as well as invaluable asset of the organization. e. The quality issues can be well tackled at very source it self. Only then proper preventive measures can be taken and the issue can be nipped at the bud itself, so that the defects can be rectified at an earlier stage and hence the complaints and complications arising out of it can be brought down to minimum level.

Bibliography:

1. Nicmar Lesson book. 2. Construction journals.